China’s Healthcare System

Dr. Adam Powell and Dr. Youfa Wang, two of several presenters at this past weekend’s US-China Intercollegiate Healthcare Conference held on Wharton’s campus, exhibited a shared awe of the rapid changes taking place in China’s healthcare profile. Among the many themes and viewpoints presented at the conference, the sense of awe emerged as the common meeting point for all attendees.

“Just look at what China has been able to do,” Dr. Powell gushed while pointing at a chart depicting the staggering rise of insurance coverage in China from 2000 to 2012. The rate of China insurance coverage has reached 95%, according to the latest numbers put forth in this months March 2nd issue of medical journal the Lancet [link no longer exits]. “In ten years [Chinese health planners] have managed to cover a billion people.”

“Every time I visit China, I’m very surprised by the many changes,” Dr. Wang, a Johns Hopkins Medical School Professor and probably the leading expert on nutrition in China, said as he pointed at his own PowerPoint slide earlier in the day, a map depicting all of China’s KFC restaurant locations. The image made the audience of ninety students and health professionals chuckle and wiggle uncomfortably in their seats.

Yet for all the agreement on the pace of change in China, Dr. Shujun Li, the recently retired head of Beijing United Family Hospital’s surgery unit was still greeted with a roomful of approving nods when he pointed out that “the term ‘market’ does not fit to today’s situation” in the sphere of Chinese hospitals and clinics. Similarly, there was a rustling of pencil on paper and a clattering of laptop keys when keystone speaker Sheldon Dorenfest, CEO of the Dorenfest China Healthcare Group, said that in China’s broader healthcare sphere the market is not the private market. Rather, “the market is the public market.”

For some, one or both statements may seem confusing. Beijing United is one of China’s two largest, private for-profit hospital chains and it is foreign owned. Yet here we have one of its medical officers saying that despite all of this, a healthcare market in China is an illusion. The Health Statistics Yearbook 2011,put out by the Chinese Ministry of Health shows that there were 13,850 public hospitals in China in 2010, compared to 7,068 non-public hospitals, hardly numbers suggesting a non-existent private market.

Two key insights make sense of Dr. Li’s statement.

First, for the majority of Chinese, healthcare is only accessible with the aid of public insurance, so there is no private market to which they can turn for alternative, non-profit services. Moreover, the health institutions they can reasonably access are all regulated by the same price control mechanisms so almost all fees will be identical. Because they cannot choose between healthcare providers on the basis of any meaningful entities, they are not really a market consumer and for them there is no market. There is a strong argument to be made that a market exists when underground practices like red envelope payments are considered but that’s an article for another day.

Second, for those Chinese who can afford to look towards private healthcare providers they don’t really have 7,068 non-public hospitals and clinics from which to choose. The majority of these non-public healthcare “hospitals” are mom and pop healthcare businesses, like elective procedure providers and check-up centers, and dental offices, that offer little or no clinical services. For example, Beijing United is successful because no other non-public hospital in Beijing offers what it does: a full range of clinical and preventative services. So, even in the realm of non-public, i.e. ‘private’ hospitals and clinics, consumers really have no choice and therefore, in a sense, there is no market.

And the insights that explain Dr. Li’s statements are critical for understanding Mr. Dorenfest’s point on the existence of a public market only. The dominance of public entities in the healthcare market who admit patients, dispense drugs and purchase medical equipment, and the small size of the private healthcare market – and, again, the private healthcare market gets very small if you don’t count the mom and pop enterprises with little or no buying power – means that entrepreneurs have to work with public entities or risk failure by betting on a very short list of private market clients.

As a side note, I am not seriously positing that there is an absence of a healthcare market in China, per se. “The public market is the market,” to be sure, is not equivalent to “there is no market.” There are many things that can be done to operate profitably in a public market, and a public market is a form of market. A combination of pharma sales and hong bao are presently being used to circumvent price controls. Also, even though pricing may be fixed, hospitals may compete with each other to some extent for volume or case-mix (some procedures may be more desirable to perform than others). Further expounding on this point, if Beijing United is really the only hospital in its class as it claims, that does not mean there is no private market in Beijing – it means that Beijing United has a monopoly (a market with one dominant player). Beijing United likely monopolizes a small high-end niche market. Other Beijingers must make the choice between going to a myriad of specialty hospitals, TCM hospitals, village and county clinics, etc. Demand at these various places is determined by the choices of the Beijingers – a market exists.

Getting back to the point, however, the big lesson, which brings together both the points on dynamic change and public market dominance, is that investment in China’s healthcare market is a task which should not be taken lightly. Not only does the gravity of issues implicate — as conference presenter Michael Zakkour principal of Technomic Asia put it — “the future of China.” The complexity of the situation also demands of potential entrepreneurs in the area a sophisticated plan of action and not a ‘shortcut’ strategy which looks to cut out the complicated labyrinth of public institutions and ministries controlling the healthcare space. Mr. Dorenfest summed it all up with the last few words in his closing address, “Even though I was a very seasoned entrepreneur in the West, I was in preschool in doing business in China and had to learn more to be successful…[I]f I bought hospitals in China with what I knew about doing business in China I would be making bad investments be pouring money down the drain.”

Dan Harris is internationally regarded as a leading authority on legal matters related to doing business in China and in other emerging economies in Asia. Forbes Magazine, Business Week, Fortune Magazine, BBC News, The Wall Street Journal, The Washington Post, The Economist, CNBC, The New York Times, and many other major media players, have looked to him for his perspective on international law issues.

I’m as surprised as you that Dan allowed me to keep that bit of flourish in the article. He usually edits out all such language out of my post. I’m more surprised, however, that he’s perhaps allowed it before, as you suggest?

I think there is some misunderstanding and mis-reporting of this 95% health insuranec coverage. The Lancet figure refers in part to the quasi-compulsory 200 RMB annual fee Rural Cooperative Medical Scheme. As the paper drily notes ‘benefits are decided locally … wealthier counties have more benefits …’ My own experience has been that in a typical rural county the scheme covers virtually nothing except first aid. Anecdote #1: We recently saw a young women in Yunnan being taken on a 10 hour bus journey to a rural hospital in a diabetic coma. She had diabetes and could not obtain basic medications such as insulin from her local clinic. Anecdote #2: A family member has a serious chronic disease. She is in theory covered by the urban health insurance, but in practice this does not cover anything but the initial diagnosis consultation. She is fortunate in having family members who can afford the medications she needs and also a medically-qualified relative who could sift through all the inappropriate and overpriced medications and treatments recommended for her by the hospital (which makes a profit on all of them). China will not have a decent healthcare system until it stops hospitals, doctors and local officials from profiting from unnecessary treatments.

Damjan Denoble

So the misunderstanding, where it exists, is due to the fact that coverage in China is a mile wide and an inch deep. The RCMS, which covers the portion of China’s population classified as “rural” on their Hukous, is a great example of this. It’s a pay first, get reimbursed later scheme, and it’s funded by provinces, with subsidies from the Central Government. And, yes, it is voluntary so you get all sorts of adverse selection hazards in the insurance pool – most notably with the tens of millions of migrant workers in cities who choose not to pay for the coverage because it gives them almost no benefits outside of their provinces.

However, to criticize the scheme just because it’s coverage is minimal is to lose sight of the fact that ten years ago insurance coverage in rural provinces was almost non-existent. The virtue of the current situation is that there is a frame upon which the Chinese government can build a better healthcare structure over time. We’re talking about a project which since 2009 has extended coverage to hundreds of millions who previously went without.

The point about graft and bribery in Chinese healthcare system is well taken. Misaligned incentives in the system are a great challenge that needs to be overcome and my talk this weekend focused exclusively on this issue. To say, however, that China’s healthcare system “will not have a decent healthcare system” says next to nothing because of the complexity of the system involved. There are, for example, some experimental programs in GuiZhou and Shaanxi, which are non fee-for-payment schemes that look a lot like preferred provider networks, where village doctor’s bonuses are tied to health outcomes and drug distribution, the primary driver of graft/corruption, has been taken out of doctors hands. City hospitals, too, are experimenting with non fee for payment systems.
Also, when you make a claim of misreporting, it implies I’ve told you something which is not true. This is false. Far from it, I presented a link which contains the information exactly as described. Your complaint is that the article is not focusing on an issue you yourself are somewhat mildly familiar with and rightly outraged by. However, the issue you’re outraged by is also complex enough that one person could spend a whole career in sudying it and writing about it, filling books and books. If this is your complaint then no article on the subject is good enough. For more information, you are welcome to visit Asia Healthcare Blog. In the meantime, adding to the discussion, without implying that the author (me) is unaware of a subject I have dedicated myself to studying is entirely possible on your part and I encourage you to practice this simplest of discussion mechanisms.

Matt

My first thought after reading the article was to put together a note similar to 6minutes’ comment. My wife and I both recently changed jobs in Beijing and we are redoing our health insurance. Entirely anecdotal but the vast majority of our Chinese options have pretty low caps. Treatments that we could pay out of savings (broken bones, etc) are covered. Treatments that would ruin us (anything major) would hit the cap very quickly.

I don’t read 6minutes comment as critical to the author. He’s adding context. Quoting that “China insurance coverage has reached 95%” and China has “managed to cover a billion people” needs context because the average reader’s understanding of being covered is different from what’s happening in China.

That said, thanks for the piece and links. They certainly added a bit to my understanding of China’s health care system.

The ‘mis-reporting’ comment wasn’t referring to your excellent article but to the way in which the Lancet paper has been interpreted by some of the media without them reading the fine print. I agree it is a very complex problem, but then again the PRC government has the ability unlike western governments of ramming through sweeping changes from the top down. However, as I think Dan mentioned in one of his earlier posts, there is a tension between the influential and wealthy pharmaceutical industry in China and the relatively powerless and underfunded health ministry.

Andeli

“However, to criticize the scheme just because it’s coverage is minimal is to lose sight of the fact that ten years ago insurance coverage in rural provinces was almost non-existent.”

I am not sure this is correct. The medical coverage in the rural areas started already with the “schistosomiasis program” in the 1950s and the “barefoot doctors” of the 1960s and 1970s. This new “insurance coverage” is basically just a very simple and small adjustment to what already existed.

Damjan Denoble

The barefoot doctors program was instituted in the immediate aftermath of the Communist party’s victory over Chiang Kai-Shek in 1949, not in “the 1960s and 1970s”. Barefoot doctors, moreover, still exist. Many barefoot doctor alumni are now classified as “village doctors”.

The schistosomiasis eradication program is still in plac, because the schistosomiasis parasite has proved stubborn to defeat (“Archeological studies have revealed that schistosomiasis japonica has a very long history in China. S. japonicum eggs were identified in a female corpse dating back to the Western Han dynasty some 2,100 years ago (footnote omitted) that was exhumed in 1971 in Hunan province”. Alen G. P. Ross, Schistosomiasis in the People’s Republic of China: Prospects and Challenges for the 21st Century).

But I fail to see how it relates to rural insurance except for the fact that it is coordinated through village clinics and other local level healthcare organizations. Perhaps Andeli is confused because anti-parasite medicines are on the essential drug list and priced at or below market.
Since commenter Andeli can neither identify the programs in question nor correctly point out that these programs are still in place independent of the rural insurance programs, I can only conclude that his conclusory statements are a result of ignorance and not the natural meeting point of any facts that bear a connection to the real world. If Andeli can put forth some evidence to support these conclusions, I am happy to debate them and build upon them to get to something resembling the actual lay out of the current rural insurance scheme as is. Otherwise, his comment as it stands, shouldn’t be taken seriously.

“The barefoot doctors
program was instituted in the immediate aftermath of the Communist party’s
victory over Chiang Kai-Shek in 1949, not in “the 1960s and 1970s”

is
an incorrect statement on your side. Unless your idea of immediate aftermath is somewhere between 10 and 20 years.

I am not sure what “The
barefoot doctors program” is, but I am guessing that you are thinking about the cooperative
health care system (农村合作医疗) that was proposed in 1956 and was
tried implemented during the land reforms but halted in the aftermath of The
Great Leap Forward. The idea of giving rural workers basic medical training,
which was introduced in 1958, had (as everything else) lost economic support during
the aftermath of The Great Leap Forward but regained strength in the mid 1960s.

My point, which you totally
and utterly missed, was that the foundation for today´s medical insurance lies
in the rural clinics and in the village cooerative health care system. Resourceful villages
have good coverage while poorer villages have weaker coverage. That is
because the money flows to those that have a strong connection with the rest of
the political system already, that means if the cunzhang is well connected in
the xiang or higher than the village gets better healthcare. So I am not sure
if this new health insurance “miracle” is anything more than an increase in funds up through the
2000s, so even the weaker connected villages got a part of the money.

As for the “The
schistosomiasis eradication program” sure the disease is still around (but is
no way near at level it was in the 1950s). A strange thing is that diabetics has replaced it
as the national disease of China. I think that says it all. My point was that this program created a systematic
national approach to healthcare that had been lacking before the 1950s.

Do you take me serious now? or do we need more history lessons?

Damjan Denoble

You made an effort this time to argue with facts. Good for you. Here’s a response.

You said:
“My point, which you totally and utterly missed, was that the
foundation for today´s medical insurance lies in the rural clinics and in the
village cooerative health care system. Resourceful villages have good coverage
while poorer villages have weaker coverage. That is because the money flows to
those that have a strong connection with the rest of the political system already, that means if the cunzhang is well connected in the
xiang or higher than the village gets better healthcare. So I am not sure if
this new health insurance “miracle” is anything more than an increase in funds
up through the 2000s, so even the weaker connected villages got a part of
the money. ”

Response:

1) I missed that point because you didn’t make it in your first post.
2) Healthcare system funding is tax based. It’s understandable that poorer villages would have less funding. I’d be interested to hear more about the political considerations that go into funding.
3) You’re the first one to refer to the health insurance scheme as a miracle. Thus far the opinions expressed on the insurance are an admiration for how quickly it was ramped up. This admiration has at all times been tempered with the proper amount of objectivity concerning the benefits, and lack thereof, enjoyed by various groups.
4) The hope is that the creation of health insurance, which is different and separate from increased funding to rural villages, will complement an increase of funds to these underfunded areas.

You said #2:

“I am not sure what the ‘barefoot doctors program is’ but I am guessing that you are thinking about the cooperative
health care system (农村合作医疗) that was proposed in 1956 and
was tried implemented during the land reforms but halted in the aftermath of The
Great Leap Forward. The idea of giving rural workers basic medical training, which
was introduced in 1958, had (as everything else) lost economic support during the
aftermath of The Great Leap Forward but regained strength in the mid 1960s.”

Response:

1) At one point in the comments, I did talk about the Rural Cooperative Medical Scheme, albeit the New Rural Cooperative Medical Scheme under which current residents classified as rural are insured. And this is certainly one of the forms of insurance coverage that is counted in the coverage numbers quoted in the article.
2) I can only guess that your attempted counterpoint to my challenge of your first claim that “This new “insurance coverage” is basically just a very simple and small adjustment to what already existed ” rests on some sort of disingenuous semantics. It’s clear enough that in my response I’m talking about the barefoot doctors of Mao’s Cultural Revolution. This program was started in 1949 (arguably it was an outgrowth of the ragtag village medicine of China’s war-plagued 1930s) and was fully institutionalized in 1968. But it’s preposterous to say that the current health reforms and the institution of universal health insurance is a “small adjustment to what already existed.” The efforts at reform are very real, very complex and very expensive. It’s true that much more needs to be done, but you’re not making this point.

You said #3:

“As for the ‘The schistosomiasis eradication program’ sure
the disease is still around (but is no way near at level it was in the 1950s). A strange thing
is that diabetics has replaced it as the national disease of China. I think that says it all. My point was that
this program created a systematic national approach to healthcare that had been
lacking before the 1950s.”1) Says it all about what?2) Schistosomiasis is still a huge problem and will continue to be so long as China has farmland and cows.3) Your point would have benefited from the rephrasing you’ve now put forth.

You said #4:

“Do you take me serious now? or do we need more
history lessons?”

Response:

I can’t wait for your book on China healthcare to come out so that I can read it.

Andeli

“I’m talking about the barefoot doctors of Mao’s Cultural
Revolution. This program was started in 1949 (arguably it was an outgrowth of
the ragtag village medicine of China’s war-plagued 1930s) and was fully
institutionalized in 1968.2”

I don´t think, as you say, that there was one single program started in 1949.
It is more complex than that, what “program” are we talking about? I really
want to know. You have to be very specific, when coming on so strong. And no,
nothing was institutionalized in 1968. It had already happened between 1958 and
1965.

Nothing started in 1949. In the first 8 years of the Chinese state focus
was on a Soviet style medical system.

I know that the Party had experienced
with medical cooperatives 医药合作社
in the late 1940s (when in Yan´an), but this was not implemented before the cooperative
funds 公益金 had been established in
the very late 1950s. If you check Mishan Gaoping county (1954/55), then you
will see that the village medical center established were based on yearly fee (保健费) paid by the locals. This system became model for
some of the People´s Communes under the Great Leap Forward.
It ran out of funds in the early 1960s, and this is where the relevance for
today´s healthcare system comes in. All the peasants that had medical issues
kept paying (and using the system) while all those who had not problems would
return to their fields and ignore the system. Still two things came out of the
Great Leap Forward 1) enlightenment through campaign and 2) education of medical
staff which became the foundation for what was later called barefoot doctors.

I 1965 the model commune was called Leyuan, and the system was again created
based on peasants paying to the collective. This system from 1965 to 1978 was a
success as the average life expectancy
rose from 55 to 65. It also cut infant mortality in half. That is how the rural
cooperative medical scheme ended up cover almost 90% of the Chinese population
in the 1970s

And now I am back to my first point “The medical coverage in the rural areas started
already with the “schistosomiasis program” in the 1950s and the
“barefoot doctors” of the 1960s and 1970s.” The system
created in the 1950s, 1960s and 1970s did end up covering a very large part of
the population. Still it ran out of funds every so often, because the peasants
had to pay for themselves, and thus the healthy ones did not and the sick ones
did.

This system was destroyed in the 1980s and 1990s. A great system of over
medication was created instead. I always wondered why Chinese hospitals would
give infusions instead of pills. After reading up on the medical system post
1979 I understood why.

That is why I think the new rural cooperative medical
scheme is a simple adjustment to the system created in 1960s and 1970s. The
RCMS payments would go to the work bridges, while in the New RCMS payments are
at county level. This means that the only adjustment is the amount of funds
posted into the system and who is accountable. I don´t see anything new, but
please educate me. And please note that the problem with NRCMS is that those
who use the system have higher medical expenses then those that don´t use the
system. This means that the system will be eroded unless the government is
willing to carry these extreme expenses. This is the same problem as in the 1960s
and 1970s the healthy don´t want to pay but the sick do.

Phil H

1) Chinese hospitals certainly do compete. Where I live there is continual intense debate on what procedures to get done where.

2) This post is very difficult to get hold of for non-Americans. Many of us come from countries where healthcare is not marketised, and markets for healthcare seem a bit absurd to me.

Damjan Denoble

1) You’re right, hospitals do “compete”, but this is not competition in the sense of market competition. Hospitals compete for patients within a set fee-for-payment system, with bonuses based on the number of patients each department within a hospital takes in. Therefore, the competition is an exercise in patient hoarding, no a competition for customer business. As a quick example, t’s not unheard of to have two departments within a city with an equally skilled medical staff and equal resources. One department will be understaffed, slammed with patients, while the other department is virtually empty. Because there is only an incentive in many hospitals to see the greatest number of patients, the department slammed with patients won’t refer them to their sister department, even though that department is ready and capable to take those patients on.

When the Chinese healthcare experts above are saying that there is no competition, they are talking about the fact that there is no incentive to improve quality of care, both in terms of patient care and allocation of hospital resources towards such things as medical device purchases. The reason for this absence of competition is that medical personnel and hospital staff get paid the same whatever they do, and medical equipment sales are all purchased from a central location.

2) Your point here is the same point as Dr. Li is making. Access to healthcare is a matter of affording all people a basic human dignity. Throwing healthcare into the market mechanism bullpit creates very perverse incentives, and America’s is a case in point for anyone arguing that market-driven healthcare is a good way for a country to throw away its money, compromise its health and poison its politics.

Peace. I did post a pretty short comment in the beginning. And yes you too make good points.

Djbrow

Very interesting article. Just from a few visits to children’s hospitals here in Beijing (Hua Xin Hospital, Bo Ai Hospital, Suzhou Children’s Hospital, etc…) it is obvious that the city, and perhaps the entire country, must make new efforts to allocating costs their costs more efficiently so that better healthcare is distributed to its citizens. I for one always supported the idea of encouraging the establishment of more WFOE hospitals, at least that would increase competition here and wouldn’t make western medical care in Beijing so expensive for many, but this article brought to my attention many things I didn’t consider about the overall healthcare system in China. I hope the U.S. and CHina continue conferences like the one they had in Philadelphia, China has the potential to do so much but other countries need more knowledge of how things works here before investing in any major projects here.

Marlon

China will export it’s brutish human mascarde to Europe one day.

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